Raytheon [RTN] yesterday reported higher net income in its first quarter driven by the absence of a charge that dented earnings a year ago and improved performance at some of its segments, which boosted overall margins and led the company to increase its earnings guidance for the year.
Net income climbed 17 percent to $448 million, $1.32 earnings per share (EPS), versus $384 million ($1.06 EPS) a year ago. Excluding discontinued operations, Raytheon’s per share earnings were $1.33 in the quarter, which beat consensus estimates of $1.16 EPS by 17 cents.
Sales were down 2 percent to $5.9 billion from $6.1 billion. The company said that 25 percent of sales in the quarter were from international customers.
Raytheon’s earnings a year ago were hampered by a $56 million after-tax charge related to a border security program it developed for Britain that the U.K. Home Office canceled for breach of contract, a charge the company is protesting.
Operating margins jumped more than 2 percent to 11.9 percent, helped largely because of no recurrence of the border security charge but also to a reduced share count, operational improvements at the company’s business segments and an insurance recovery.
At the operating level, Raytheon’s Missile Systems, Integrated Defense Systems and Space and Airborne (SAS) segments drove the margin results and higher operating income due to favorable contract mix and improved program performance. Company officials on yesterday’s earning call cited a number of reasons for improved performance including a continued focus on various initiatives related to the supply chain, manufacturing processes, overhead and materials costs, and a shared services model.
The decline in revenues was mitigated somewhat by slight increases in international and classified sales. Non-classified domestic sales were down just over 3 percent. At the segment level, double digit sales declines at the Network Centric Systems segment, which were off as expected due to reduced volume with the Army, and a scant decrease at SAS, more than offset increases at Missile Systems and the Intelligence and Information Systems divisions.
Sales guidance for the year remains intact at between $24.5 billion and $25 billion while the EPS guidance has been raised a dime to between $5 and $5.15 to account for the better operating performance.
The guidance bakes in the likelihood of a continuing budget resolution to open the start of the government’s fiscal year in October, William Swanson, Raytheon’s chairman and CEO, said. As for the looming specter of a federal budget sequestration beginning in 2013 that could force the Pentagon to find more than $50 billion in cuts that year, Swanson believes that big programs would be targeted for savings rather than taking a “peanut butter” approach that spreads cuts across the board.
Given that sequestration would impact the entire federal budget, Swanson expects the government to find a way to get into a year-long “holding pattern” beginning next January until differences separating Republicans and Democrats can be resolved.
Backlog at the end of March stood at $34.3 billion, up $600 million from a year ago. Nearly 40 percent of the backlog is from international orders, which helps cushion the company from any blows stemming from sequestration, suggested Dave Wajsgras, the company’s chief financial officer.
Bookings in the quarter were $5.2 billion, with international business accounting for 27 percent of that and classified work 26 percent.